IRS issues 2005 depreciation dollar limits for business autos, light trucks and vans

I am confident the number one business tax question asked is…... “how much will I be able to write off if I purchase a new auto?” Personally I think CPAs should receive a percentage commission from auto manufacturers and dealers. The answer to the “how much will I be able to write off” depends on a couple of factors – how much is the auto used for business (yes the infamous auto log), how much does the vehicle weigh and what is the cost. With the help of our tax service RIA (Research Institute of America), listed below are the gory details. I have tried to lighten it up somewhat.

Recently the IRS has released the inflation-adjusted depreciation limits for business autos, light trucks and vans (including minivans) placed in service in 2005, and the annual income inclusion amounts for such vehicles first leased in 2005. The new IRS guidance also carries the depreciation limits and lease inclusion amounts for electric autos. 

Year-by-year limits.

There are two sets of dollar limits for non-electric (good old Texas Crude vehicles) vehicles placed in service in 2005. One set of limits is for passenger autos that are not trucks or vans and are subject to the luxury-auto limits (they are rated less than 6,000 pounds unloaded gross vehicle weight or less). 

The other is for light trucks or vans (passenger autos built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis). Light trucks or vans are subject to the luxury-auto limits if they are rated at 6,000 pounds gross (loaded) vehicle weight or less.  

Following are the annual depreciation dollar caps for vehicles that are subject to the luxury-auto limits and placed in service in service in calendar year 2005. 

For passenger autos less than 6,000 lbs.:
 
$2,960 for the placed in service year;
$4,700 for the second tax year;
$2,850 for the third tax year; and
$1,675 for each succeeding year.
 

For light trucks or vans (passenger autos built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis) that are less than 6,000 lbs. but not considered a vehicle that would normally be used for business:
 
$3,260 for the placed in service year;
$5,200 for the second tax year;
$3,150 for the third tax year; and
$1,875 for each succeeding year.

RIA and NC caution: The dollar limits must be reduced proportionately if business/investment use of a vehicle is less than 100%.

RIA and observation: Heavy SUVs-those that are built on a truck chassis and are rated at more than 6,000 pounds gross (loaded) vehicle weight-are exempt from the luxury-auto dollar caps because they fall outside the definition of a passenger auto. In the past a taxpayer could expense up to $100,000 of the asset’s cost. However now not more than $25,000 of the cost of a heavy SUV placed in service after Oct. 22, 2004 and used 100% for business may be expensed under Code Sec. 179. The balance of the heavy SUV's cost may be depreciated under the regular rules that apply to 5-year property (e.g., a 20% first-year depreciation allowance if the half-year convention applies for the placed in service year).

I should also note that one other class of vehicles exist where no limit is applied at all regardless of weight. That vehicle is the traditional business vehicle such as a cube van, specialized truck etc.

New lease income inclusion tables. A taxpayer that leases a business auto may deduct the part of the lease payment representing business/investment use. If business/investment use is 100%, the full lease cost is deductible. So that auto lessees can't avoid the effect of the luxury auto limits, however, they must include a certain amount in income during each year of the lease to partially offset the lease deduction. The income inclusion amount varies with the initial fair market value of the leased auto and the year of the lease, and is adjusted for inflation each year.

The IRS publishes tables that determine the income inclusion tables for passenger autos, light trucks and vans with a lease term beginning in 2005. The lease income inclusion tables don't apply at all unless the fair market value of a passenger auto exceeds $15,200 (down from $17,500 for 2004) and $16,700 for trucks and vans (down from $18,000 for 2004).

RIA and NC observation: This means that more passenger autos, trucks and vans will be subject to the lease income inclusion rules.

Electric autos. The depreciation dollar caps for qualifying electric autos placed in service in 2005 are roughly triple the limits for passenger autos. The dollar limits are $8,880 for the 1st year, $14,200 for the 2nd, $8,450 for the 3rd, and $5,125 for each succeeding year. Electric autos are subject to a different lease income inclusion table also.

Ok, when you call me this year asking about auto write off, I will still explain the current rules – however, I will refer you to this article.
 
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